Challenges of Expansion into China - Case Study Example

Challenges of Expansion into China Table of Contents Challenges of Expansion into China 1 Table of Contents 1 Executive summary 2 1.Introduction 2 2.Five key issues/ challenges 3 2.1.Extended lead time of supply 3 2.2.Extended and unreliable transit times 3 2.3.Multiple consolidation and break points 4 2.4.Multiple freight modes and cost options 5 2.5.Pricing and currency fluctuations 6 3.Recommendations 7 4.References 8 Executive summary A reputable wine company in Barossa wants to set up additional bottling plant in Yantai, Shandong province with an eye to catering to Chinese market next year. Doing business is unlike doing business elsewhere in the world, so there are a number of areas of concern on this proposal to set up the plant. This paper analyses five of such concerns and attempts to delve deep into how they are likely to impact the business if led to the operational stage. 1. Introduction Even as China's business is booming, it can be a daunting task to do business in that country. In 2010, China emerged as the second largest economy of the world and its annual economic growth rate has steadily at 10 percent for the last three decades. That is an impressive number and has the potential to lure any foreign company China's shores to tap into its vast and growing market. The picture seems very glossy on the outside; however, when one is "into it", it is realised that Chinese way of doing business is unlike how it is done in rest of the developed world. For establishing and thriving in the Chinese market, foreign companies must have a thorough and practical knowledge on the major challenges that the country throws for a foreign entrant. To succeed under the shadow of these challenges' stiffness, one needs to face them head-on. Given the experience of working with medium and small sized companies to get established in the Chinese market, many foreign companies assisting others to enter this market, have shortlisted a number of major challenges that companies face in either establishing, operating or growing businesses in China. Five major challenges that the wine company in Barossa in setting up a bottling plant in Yantrai, Shandong could be i) extended lead time of supply, ii) extended and unreliable transit times, iii) multiple consolidation and break points, iv) multiple freight modes and cost options, v) prices and currency fluctuations.. 2. Five key issues/ challenges 2.1. Extended lead time of supply For some time now competitiveness of time as a weapon has been recognised. It is of critical importance for a foreign company in Chinese landscape to meet customer demands of shorter delivery times (Stalk, 1998). For any foreign company, thus, the extended lead times pose a significant challenge, particularly during troughs and peaks in an era that is based on time-based competition (Stalk and Hood, 1990). Red tape, to some extent, is supposed to be one reason for this. Bureaucratic and administrative tasks that have been streamlined and simplified in the developed nations are still time-consuming in China. That might be the first frustration to begin with as the bottling plant would have to undergo all that from the very stage of its conception. It might take months to get the plant registered, to open a bank account and get necessary approvals. There is an inconsistent application of regulations and lack of strong rule of law which might be an instant turn off as they would not seem to be going by the type of convenience the company expects. Apart from this Chinese way of working involves a lot of paperwork; something that is easily handled electronically in the parent country. This would require drudgingly long times. A dedicated group of people will have to be hired to accomplish this job for the company in order to get started if not productive in the first place. To stay afloat in the market, it is important for a foreign company operating in Chinese market, to be highly responsive to the market demands. Speed is more than what is required. High levels of manoeuvrability, which in today's business world is termed as agility is highly recommended. Chinese markets throw some challenges in this regard. 2.2. Extended and unreliable transit times International logistics pipelines are fraught with increased uncertainty and length, which leads to both unplanned and planned inventories to go into a mode which is higher than optimal. Inventory gets held for more time as variations in time cannot be avoided. This is further complicated by language barrier that foreign operates encounter in China. Foreign companies face cultural misunderstandings because of the language barrier in China, which is predominantly China-speaking. That is not to say there is any dearth of people who are well-versed both with English and Chinese languages, but finding just the right person for doing such a job, like that of attempting to expedite the inventory, might be difficult in the first place. The company would need someone who is proficient in both the languages, who understands the subtleties of wine business and who is adept at negotiating difficult business situations. USPRI – US Pacific Rim International, Inc., a company helping businesses get established in China has quoted several instances in which heads of foreign companies go to China and return back with huge business prospects (USPRI, 2010). But as time passes by and negotiations continue, more often than not the prospects are dulled because of effective communication between the two sides. It is assumed that such a thing happens because Chinese find it difficult to communicate the nuances of doing business in the country and foreign representatives find difficult to understand the same. Such a scenario reflects in almost every second task that the company takes up – be it handling transit times, transit clearance or other things. Lack of effective communication lets misunderstandings crop up, which mar the business prospects between two sides. USPRI opines that to avoid such thing from happening, foreign companies must hire expert international teams that can bridge the communication gap between the two sides that have cultural underpinnings. Modelling of transit networks has been done for some time now and in this regard Wilson et al (1992) and Osuna and Newell's (1972) works are credited for having captured the essence of this issue in greater detail. 2.3. Multiple consolidation and break points Costs in the pipeline can be reduced in many different ways and consolidation is one of them. For this bottling plant it is important to achieve economies of scale. Several methods are employed to accomplish this. One of them is batching together goods produced in different locations for transport to a market that is common between them all. In case of this plant, however, that might not be applicable as much as expected since the company does not intend to open any other plant in China. However, if the company operates in some neighbouring locations, then consolidation can work in its favour. However, the company would need to pursue cost saving efficiencies by reengineering its supply chain initiatives which would involve consolidation, systemic review and renegotiation of major supplier relationships. Supply chain consolidation makes good business sense and even as consolidation may have hidden costs, they are still expected to yield greater benefits. In Chinese market there is also another flip side to this scenario. How well do you fare in your business is how great your human resource is, because in China human resource is a major challenge and any laxity in the same has a ripple effect throughout the supply chain. Chinese workers are more hierarchical than flexible in terms of exerting authority. Human resource is a challenge in this country because there is little delegation of work that one can do. Roles in Chinese workplaces are pre-defined, which limits freedom of expression and thought, and thus curbs innovation and exchange of ideas. Such contradictions in working styles can mount tensions between foreign and local workers in the proposed bottling plant. Chinese are trained, from an early age, to follow instructions in a top-down fashion. It is difficult for them to innovate as they are bound not to deviate. As a result of this the bottling unit needs to have clear set of procedures regarding both punitive and incentives measures for substandard performance. Also, rather than expect to either delegate or follow a top-down approach, it will be prudent for the company to resort to a middle path of diving workers into smaller teams and each team having a capable head to whom the rest report to. Chinese workers would need to be motivated continuously and also encouraged to be risk-takers and creative. 2.4. Multiple freight modes and cost options Transportation costs are of great significance in a business involving supply chain. Correct transportation strategy in any business is considered as one factor leading towards its success. In any supply chain the movement of goods takes place between a shipper and a carrier. In case of this bottling plant, it will, in fact, be both. One, it will receive goods from its parent location in Barossa and then ship goods from its Yantai location to respective markets in China. So it will have to make supply chain decisions both as a shipper and a carrier. This will be a key challenge for the unit as while making decisions, it will also have to see the business viability and logic behind those decisions. It has to maximise the return on whether it decides to use locomotives, rails, trucks or airplanes in transporting its products. In other words it will have to have clear cut operating policies in place, with an eye on suitable returns on its investments. The Chinese market will throw a significant challenge in front of the plant in terms of vehicle-related cost, fixed operating cost, trip related cost, quantity related cost, and overhead cost. As a shipper it will have to take strategic decisions on transportation cost, inventory cost, facility cost, processing cost, and service level cost. 2.5. Pricing and currency fluctuations Shipment consolidation, delivery times or lead times - all go in tandem with the pricing and currency rates that throw a challenge to a business in a non-domestic market. Studies related to pricing are now as old as 6 decades. Chang et al (2004) has given an in-depth account of pricing and its coordination with inventory control. There are also other factors involved which include delivery time and lead times. Keskinocak and Tayur (2005) have remarked that it is all about due date management. Meissner (nd) has remarked that recently the revenue and pricing management has undergone a sea change and are mostly determined by the markets in which companies operate. That is to imply that how the company would be pricing its products in Barossa would not necessarily be the benchmark it can use while selling its products in China. In the recent times a number of factors in the highly information-oriented world are also responsible on how products are fixed. These include the adoption of new information technologies and also techniques and methodologies and of course Internet. But that normally holds true about open economies. China is a relatively closed one; highly guarded against certain thing what are otherwise freely open to public elsewhere in the world. So applying pricing models elsewhere would not be as easy as here. The wine company is new to China, so has little know-how on Chinese consumer behaviour. It will, thus, be a challenge to handle multiple issues all at once in as far as pricing decisions are concerned. For any business located in a foreign market, fluctuating currency rates have a huge impact on how business behaves. It is of utmost importance to follow these rates that change by every second and often without warning. If the fluctuations are favourable, that is very good; but if on the wrong side, they can turn any business upside down in a jiffy. So while working on China as a production unit, the onus lies on the local head to have some in place who can closely monitor the fluctuating currency rates. If left unobserved, the immediate negative effect will be felt across everybody in the supply chain (Hess, 2013). 3. Recommendations China follows very stringent rules and regulations and Chinese law is very specific in dealing with any violations. So it is highly recommended that in whatever tasks are to be taken up by the proposed plant, thorough knowledge is sought about it, the applicable rules and laws from experts in the field before embarking on the same. It is also important to safeguard human rights of the Chinese workforce (Rosoff, 2003). Wherever possible and necessary efforts should be made by the company to discuss with Chinese experts or authorities matters of concern that may arise in the beginning or from time to time as the plant gets commissioned. The company should make sure that it has someone on board who knows both Chinese and English langue and who can deal with cross-cultural issues (Huchet, 2003). 4. References Chan, M. A. et al, 2004. Coordination of pricing and inventory decisions: A survey and classification. In D Simchi-Levi, S. D. Wu, and Z. J. M. Shen, editors, Handbook of Quantitative Supply Chain Analysis: Modeling in the E-Business Era, Kluwer Academic Press, 335-392. Keskinocak, P and Tayur, S. 2004. Due date management policies. In D. Simchi-Levi, S. D. Wu, and Z. J. M. Shen, editors, Handbook of Quantitative Supply Chain Analysis: Modeling in the E-Business Era, Kluwer Academic Press, 485-553. Hess, Jeremy. (2013). How Exchange Rate Fluctuations Affect Internatiional Businesses (and Ways to Protect Yourself). Available: http://isratransfer.com/how-exchange-rate-fluctuations-affect-international-businesses-and-ways-to-protect-yourself/. Accessed May 16, 2013. Jean-François, Huchet, 2007. The social responsibility of foreign companies in China” (“La responsabilité sociale des enterprises étrangères en Chine”), study by Jean-François Huchet, published by CGT/FO-IRES, p. 89. Meissner, Joern, nd. Dr. Joern Meissner: Professor of Supply Chain Management & Pricing Strategy. Available: http://www.the-klu.org/meissner/. Accessed 16 May 2014. Osuna, E. E., and G. F. Newell, 1972. Control Strategies for an Idealized Public Transportation System. Transportation Science, 6, 52-72. Robert J. Rosoff, 2003. Corporate Responses to Human Rights, China Rights Forum No. 1, 2003. Stalk, George, 1988. Time: The Next Source of Competitive Advantage, Harvard Business Review, 41-51. Stalk, George and Thomas Hood, 1990. Competing Against Time, New York: The Free Press. Wilson, N. H. M., D. Nelson, A. Palmere, T. H. Grayson, and C. Cederquist. 1992. Service-Quality Monitoring for High-Frequency Transit Lines. In Transportation Research Record 1349, TRB, National Research Council, Washington, D.C. 3-11. Read More